Wednesday, August 24, 2016

A recent column in
the New York Times about Donald Trump’s possible tax treatment on his
not-yet-released federal or state income tax returns cited the possibility that
he could be paying very little, if any, income tax - based on Trump’s use of available
tax law treatment for actively conducted real estate rental, management, and
development effort.

﻿﻿However, Trump’s trade or business asset holdings today
consist mainly of hotel and other business interests, and not primarily real
estate rental or development interests as was the case many years ago. This
presents a different type of taxpayer profile, and filing results.

﻿

TRUMP’S TAXES: Real Estate Tax Shelter or, Trade or Business Losses?

Internal Revenue Code Sections provide for the ordinary
deduction of “losses realized in a trade or business” for a taxpayer “engaged in
a trade or business”. This term, trade or business, means virtually any kind of
enterprise conducted by a taxpayer, unless limited by IRC Section 469 – “Passive
activity losses & credits limited”. Section 469 applies when a taxpayer has
a business interest, and a loss from such interest, but, does not “materially
participate” in their business - especially rental property.

The hotel business is not “rental property”. It is a true
business with employees, varied activities, many different types of revenue
streams other than (merely) rent, and high levels of risk and reward. Most
hotels have two sets of owner/operator companies: the land and building owner,
and the operating owner. These two companies may be two completely different
sets of owners, or intermixed.

A main tax benefit of a hotel property ownership interest is
the large capital investment in both real and personal property. Commercial
real property generally has a long depreciable life of 39 years. But personal
property, such as furniture, equipment, interior improvements removable in
nature or, serially replaced, will throw off large annual depreciation
deductions often in excess of the cash equity invested in the business. The
hotel business operator also operates several restaurants, bars, casinos, spas,
etc. in its business.

The Result: large depreciation deductions in the
conduct of a trade or business, combined with a few operating loss realities or
years, other tax optimization strategies, can yield a well-sheltered (otherwise
positive) total taxable income. Add some “net operating loss (“NOL”) carryover”
deductions from prior total tax loss years – which may be carried over for up
to twenty years, and the result can be an ongoing total negative income for
years. Further: given Trump’s serial business failures, he may have a large
closet of NOL’s to draw on.

Today’s Sunday NYT ran an article on Trump’s asset holdings
and liabilities, found on public records. I wrote this piece yesterday, but,
the article validates what I say above. It also says Mr. Trump is the recipient
of some 500 LLC Schedules K-1 which then need to be flowed into and reported on
his individual tax returns. This is an absolutely complex, taxpayer profile.

About Me

Lisa Powers, CPA, M.S., Law of Taxation has practiced in the San Francisco Bay Area since 1981 as a professional in the fields of accounting and tax practice, real estate investing, and strategic business planning. Her two companies, Powers Equity and Powers Accountancy Corporation, specialize in closely-held entities. Ms. Powers and her firms’ work encompass a range of business issues in response to the tax and business needs of her clients.